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Rahul Jain, Department of Economics, State University of New York, 407 Fronczak Hall, North Campus, Amherst, NY 14260, 716 6452121, rhswj@buffalo.edu

It is believed that individuals exit the insurance market due to adverse shock to either income or insurance-premium or both. This paper studies the role of imperfect information and subsequent learning about health endowment on individuals' decision to continue insurance coverage. We show that rational individual may exit the insurance market even in absence of adverse shocks to income and/or premium. We assume that unknown health endowment and age are the only determinants of losses due to medical-care expenses. Individuals receive noisy signals about their endowment by observing these losses as they advance in age. They incorporate this additional information in the decision making process by updating their beliefs about their health using Bayesian-Learning. Favorable (unfavorable) new information diminishes (increases) the valuation of continuing coverage. As individuals grow older, they accumulate additional information, which increases the precision of the beliefs. More precise beliefs react imperceptibly to new information. Therefore, new information influences the beliefs of young more than of old. Moreover, increased precision induces a mean preserving decrease in risk, reducing the demand for health insurance. We call it learning effect of age. The other effect of aging is the biological depreciation of health, which increases the size of loss. This increases the demand for health insurance and we call it the aging effect of age. Consequently, there is a continuous trade off between gain in precision and increase in loss as individual grows older.

Bayesian-Learning implies learning effect weakens with age. However, aging effect strengthens with age. Hence, we expect that the aging effect will override the learning effect at a unique point over the life span of an individual. Thus, we predict that controlling for changes in income; premium, and new information, middle-aged individuals are least likely to renew insurance coverage.

We then use MEPS data for 1997-2000 to test this model. We select individuals who are single, non-elderly, ineligible for public insurance, and privately insured in the reference period and estimate their probability of insuring in the subsequent period. We construct a measure for new information and find that the likelihood of reinsuring increases for adverse surprises. This relationship between new information and continuing coverage is stronger for young than for old. We also find that the impact of age on the likelihood of reinsuring is non-monotonic, decreasing until 37 years of age, and then increasing, as predicted by the theoretical model.

Learning Objectives:

• The objective of this study is to explore alternative reason(s) for exiting the health insurance market. We show that rational individual may exit the insurance market even in absence of adverse shocks to income and/or premium. These findings have important implications on the public policy issues.

Keywords: Health Insurance,

Related Web page: www.acsu.buffalo.edu/~rhswj/jobmarket.html

Presenting author's disclosure statement:

Any relevant financial relationships? No